13th October 2013
Lombard Odier says it has concerns about the US credit markets and warned investors that they could be overexposed to some sectors compounding the risk from the debt ceiling stand-off.
Kevin Corrigan, head of credit at Lombard Odier Investment Managers, has told bond investors that they need to lend prudently, focusing on Verizon Communications bond issuance in particular and how this has concentrated risk.
“Like all good bank managers, bond investors need to lend prudently – and that doesn’t mean just on the basis of size or price. For companies today, the high grade credit markets would suggest that size and price are minor issues – investors are falling over themselves to lend money. Recent weeks have seen a combination of factors that should cause concern.”
Corrigan makes the following points to underline his case.
* September was a record month for issuance in US Investment Grade credit – $143bn surpassed the previous record month of May 2008*
* $49bn of this came from one issuer – Verizon Communications
* Verizon’s weighting in the Barclays Global Agg Corporate Index (a $7trillion universe) increased from .5% to 1.25%. So bond investors will now be gauged against an index where Verizon’s weighting increased 150% overnight
* The Verizon issue was snapped up by bond managers
* The lesson of 2000 should not be forgotten: huge issuance to pay for things like 3G mobile licenses meant that the telecoms and tech sector that year made up 63% of the European credit universe. This meant investors had a huge overweight to an over-borrowed sector, which subsequently went on to collapse in the next 2 years.
“While equity markets in September fell significantly on news of the US debt impasse, credit markets have barely moved. If the impasse continues credit markets may very well play catch up, rapidly and painfully for investors,” says Corrigan.
*source Morgan Stanley, Dealogic, Thomson Financial